Life Insurance Planning

May Have A Place

In Your Overall



A view from the opposite side of investment risk

what life insurance can do for you

What life insurance planning represents is a tool

There are plenty of online options for the masses to find the most affordable life insurance. If your life insurance needs are beyond the ordinary, you need appropriate proficiencies so all factors can be weighed to provide you with sound advice.

This content is meant for those in search of subject matter expertise for more complex life insurance planning applications for tax, trusts, business, and retirement planning purposes. Each of these scenarios can have correlations and constraints that can just as easily protect as they could harm your outcome if implemented incorrectly.

It is for that reason that we focus on helping you navigate and implement the proper measures to achieve your goals.

Life Insurance Planning Considerations

Our mission at Tax Smart Investing and Planning is to place a spotlight on the tax implications of all financial decisions. We would be remiss if we did not discuss the less used and more controversial application of life insurance planning in advanced strategies for tax and trust planning, tax-free accumulation of asset growth, as well as the potential for tax-free withdrawals that can be possible if designed and executed correctly.

These strategies are not designed for the traditional nuclear family. Life insurance planning benefits those whose financial resources have created a need for shelter from taxes, protection of significant assets, considerable business holdings, the need for estate safeguards, or wish to extend charitable endeavors, and as fiduciaries who are well-versed in each of these scenarios, we also believe that is not a solution that fits every situation. This is also not meant to be a stand-alone strategy, only a small part of an overall financial plan.

With that said, the details expressed here will directly reflect the application of permanent life insurance as a planning tool. Term life insurance can have its place, but the limitation of time defeats the benefits of using it for long-term life insurance planning purposes unless those plans are structured to be short duration or a time-based need and only for a catastrophic event.

Tax Planning

There is no predicting what legislative changes will mean for our future taxes. Most believe that inevitable tax hikes will be upon us, sooner rather than later. Make sure that your tax planning examines all available options.

Estate Planning

Your life insurance should outlive you, but once it becomes part of your estate planning, it MUST be designed to live beyond you. There is no place for short-sighted implementation when it comes to your estate planning needs.

Retirement Planning

Life insurance is generally a selfless endeavor. It represents a safeguard for those we love. Your plans could also be designed to represent your living needs through retirement planning for today while also providing for your loved ones for tomorrow.

Business Planning

Do you have business partners? Have you thought about business succession strategies? Do you have valuable key employees or executives? Ensure that your best interests and those of your company are protected through the leverage of life insurance planning.

Legacy Planning

Imagine how legacy planning could allow you a powerful financial instrument that can simultaneously provide you peace of mind, while also being tax-favored, without 1099s or capital gains, and without restrictions of use for your children or grandchildren.

Income Protection Planning

Life can present curveballs unexpectedly. A contingency plan for living expenses in the event of a disability is crucial to maintaining your lifestyle. This risk is further multiplied when you are the primary household income or a principal business partner. Life insurance planning can provide a necessary lifeline when you need it most.

Charitable Giving Planning

You’ve been fortunate enough to share your good fortune with others. Your ideal plan would allow you to support your beloved causes well into the future. Optimize giving beyond your lifespan with well-executed life insurance planning.

What life insurance is capable of accomplishing from a planning perspective may surprise you

If you work with a fee-only advisor, your investments may be addressed, but you have never discussed life insurance planning as part of your overall financial planning. If they send you to someone that has simply spent 52 hours to get their life insurance license, they are doing you a disservice.

What life insurance planning can do for tax planning

First and foremost, a permanent life insurance policy develops cash value by way of interest or dividend credits from premium payments over time, and normally while it grows in value, the growth is not taxed. Unlike investments that generate capital gains.

Retirement accounts can grow untaxed until it comes time to make withdrawals. Even if we consider ROTH options, unless you have a ROTH 401k, your income threshold will eliminate this option. Life insurance cash value can be used for future withdrawals and can be tax-free. As long as you are not underfunding the policy or taking excessive withdrawals, the health of your permanent life insurance policy will provide cash value growth throughout your lifetime.

One day when the life insurance policy is exercised, the payment to your beneficiaries under normal circumstances is a tax-free death benefit.

What life insurance planning can do for estate planning

Taxable benefits are the primary advantage of permanent life insurance in estate planning because of the leverage it creates. Death is generally unexpected and the timing could trigger a need to liquidate assets or the sale of property at an inopportune time. The proceeds of a life insurance policy can cover these concerns.

Perhaps there could be business interests or assets that may not be divided in a way that will satisfy all of your heirs or business partners. Life insurance planning can be the remedy by creating equity where perceived inequities may have caused friction.

What life insurance planning can do for retirement planning

If your income reaches a certain limit, you lose the option to save within a ROTH retirement account, unless you’re lucky enough to have a ROTH 401k option at work, or you have chosen to include life insurance planning in your long-term financial planning.

Within a responsibly designed whole life insurance or universal life insurance policy you can implement funding strategies for tax-free withdrawals in retirement. Since it doesn’t follow retirement account rules and restrictions, funding amounts are for the most part unlimited, and there is no minimum age to access funds, and as such, does not trigger penalties.

If the policy is properly structured to stay within the IRS guidelines, so as not to trigger characterization of an investment, you can take systematic withdrawals without recognition and therefore be deemed non-taxable.


What life insurance planning can do for business planning

The untimely death of a business partner can be devastating, especially if their expertise, insight, or relationships were driving your revenue. This becomes worse if you don’t have the money to buy out their surviving spouse or find yourself sharing half of the profits with someone who cannot help run the business. This can be very similar if you were to lose a key employee that drives your revenue.

Establishing a buy-sell agreement or key person protection, but not paying it with excess cash, but a life insurance policy can mean the difference between a business being sustained at a difficult time, or needing to close without options.

Designing an executive bonus plan can be built around cash value life insurance with a “golden parachute” to retain the best people through to retirement.

How about an exit strategy? Business succession planning needs to occur long before debating when to retire. Apart from numerous retirement strategies through investments, life insurance planning can be another avenue for accessible tax-free cash when you’re ready to retire.

What life insurance planning can do for legacy planning

Permanent life insurance can play a major role in replacing lost income to your heirs, providing immediate liquidity to pay debts, mortgages, and other expenses, providing cash to meet estate tax liabilities, equalizing inheritances among heirs, and preserving a business by helping fund a buyout of the interests of a widowed spouse.

Deciding to use life insurance planning for the lives of your children or grandchildren can create a legacy beyond you. You can protect their future insurability, and provide them with an instrument that will provide tax-free cash for college, a wedding, and even a down payment on their first home to help them start a future legacy of their own. 

What life insurance planning can do to protect your income

Your most valuable asset is not your home, investments, or retirement accounts, it is your ability to earn an income. Becoming disabled due to an accident or injury that prevents you from working could immediately affect your income, especially if you are the primary wage earner.

As an employee, you could receive CA State Disability, but that will only be a maximum of 60% of earnings. That alone could be a huge drop in income, but if you earn any of your income in the form of commissions, bonuses, or profits, that is not counted. If you make beyond the income cap of State Disability, that excess is also not counted.

With a properly designed permanent life insurance policy you can include provisions for disability. When you have a financial instrument that is primarily meant for a completely different purpose, having this option within a life insurance policy to pay you a monthly income in the event of a disability could be a lifeline in an extremely challenging time.

What life insurance planning can do to extend charitable giving

Apart from your altruistic inclination to leave financial support to the meaningful causes in your life, life insurance planning can create a windfall.

Your bequests can be larger by leveraging a smaller contribution that immediately becomes more utilizing life insurance. If you were to transfer ownership and beneficiary designation you or your heirs could gain a tax deduction.

Outside of a life insurance policy, using life insurance carrier instruments, you could structure a charitable gift annuity, from there, a charitable remainder unitrust, or an annuity trust for life income gift can become a gift that pays you an income during your lifetime.

What life insurance planning can do for you, has more to do with the path you choose

Defining your needs with Whole Life Insurance of Universal Life Insurance:

When you make a choice to invest, most will choose a side: Aggressive or Conservative. You can be moderately aggressive or conservative, but accepting or deferring risk exists in everyone’s nature. Whole life insurance and universal life insurance are much the same debate.

The major differentiator of permanent life insurance options is that universal life insurance provides flexibility, and whole life insurance provides guarantees. If we discuss funding (premiums), whole life is set, whereas universal life is flexible. If we discuss death benefits, whole life is fixed, whereas universal life can fluctuate. Many other factors are similar.

Both types of permanent life insurance take your premiums and separate a portion for “insurance” and a “savings-investment” portion.

In universal life, you are the one to take responsibility for how your policy earns interest each year. The calculation used for the interest your policy is credited with comes not from the insurance carrier, but from an outside factor, most often mutual funds, or a stock market index.  Whatever you choose, universal life will be directly correlated to the performance of the stock market in some way. This means that the savings-investment portion of your policy can benefit from stock market highs, but can also be affected by the lows.

In whole life, the company you choose takes on the responsibility to pay a stated dividend each year. The dividend credit in a whole life policy is purely based on internal factors, governed by the insurance carrier to run responsibly and profitably to share and distribute profits to their shareholders in the form of dividends. Whole life companies do not have public shareholders tied to Wall Street, their policyholders are their only shareholders.

The savings-investment portion of your whole life policy’s dividends have no direct tie to how the stock market is performing. As an example, in these past few years of stock market volatility, the greater majority of policyholders have seen very little change in their dividend distributions, because the companies behind these whole life policies make investments that are often long-term strategic holdings, only minimally affected by the course of a few rough stock market years.


For long-term planning purposes, universal and whole life insurance can be a unique consideration. There are two sides to every argument. Some say that buying term insurance can cover your insurance needs and your investments can do better individually, versus any type of permanent life insurance where insurance and investments coexist.

Others might say that paying for a term insurance policy that is statistically only paid 2% of the time because people outlive them, makes no sense. The term policy of 20-30 years expense held value while in-forced, but as soon as its expiration comes it is worthless, despite the cost over all those years. As for the pure investment, even with low-cost ETFs on Index funds, over the same time span would indeed generate minimal fees, but the heftier fee was all the years of capital gains.

The main point is that each argument has its merits. We believe that the best planning finds opportunities. Where taxes present a future consideration, life insurance planning can be valuable. Where higher incomes eliminate ROTH options for tax-free retirement savings, life insurance planning can be extremely valuable.

Life insurance planning can offer numerous advantages, so how about the disadvantages?

The question that you are surely asking yourself must be, why aren’t there long lines of people demanding to buy more? The answer comes in all the reasons that life insurance planning is a unique strategy that fits a specific need.

We believe the greatest concern in implementing a life insurance planning strategy is an inexperienced or unethical insurance agent, primarily focused on their financial gain over your long-term needs.

We can not stress enough that someone who is only insurance licensed to sell insurance does not understand the intricacies and implications of taxation within trusts, retirement strategies, or business planning considerations. Expertise, knowledge, and capabilities aside, your best interests MUST come first.

We assist clients with this type of strategy only if it truly benefits their unique circumstances, and frankly, if we do, we are often engaged in much more than life insurance planning.

A policy designed for planning will be expensive when compared to “pure insurance”/ term insurance.

To have a permanent life insurance policy properly designed for planning purposes requires that it does not accept that things will go as planned. The nature of the design must take into account contingencies, the predictable and unpredictable. In doing so, the costs will be higher. The tradeoff for this is if things do take unexpected turns, the plan will still play out well, and if things do go along a predictable path, then all the better. Term insurance can do the same…, until it expires.

    Life insurance planning

    Thinking outside the box can be illuminating

    What life insurance policies can produce within the savings-investment portion cannot compete with a traditional brokerage account.

    A universal life insurance policy can have the savings-investment portion allocated to institutional mutual funds or even the S&P 500. In a brokerage account, you can do the same with potentially minimal fund management fees.

    A universal life insurance policy can have cost of insurance, sales charges, admin fees, mortality and expense risk charges, surrender charges if you cancel the policy early, and of course the same fund management fees for the mutual funds if you elect them. Why would you even consider this?

    The brokerage account (with growth) has generated capital gains year after year. The life insurance is tax-deferred or will be tax-free if executed properly. If you chose index universal life, you will never take losses from stock market declines. The brokerage account, even with buffered ETFs will take a hit.

    If you use whole life, the savings-investment portion is based on dividends, not correlated with the stock market. If your brokerage account were to take a hit this year like 2008, you would still be credited 5.5-6% dividend this year in your whole life policy. All of this still does not take into account that if you were pass away tomorrow, your beneficiaries would receive a tax-free death benefit.

    Life insurance planning should only be one piece of the equation

    Life insurance planning may not address all of the possible tax advantages, or can it?

    Your various investments and retirement assets are all part of what represents your wealth. Tax opportunities exist in each. Life insurance planning is meant to support these and many more financial considerations. We believe that any opportunity for tax planning should be explored and where beneficial, be applied.

    The most important factor in using life insurance planning is the design of the instrument used to execute all that you plan. If your plans change in the future, remember that a well-designed policy has multiple purposes.

    The main point for living purposes is that you can use it for tax-free withdrawals for any purpose you choose, supplemental retirement income, caring for loved ones, etc… For death benefit purposes it will care for your heirs, business/ business partners, estate, or charitable causes no matter how it may have originally been intended. A trust (as long as revocable) or beneficiaries can always be modified.

    Our recommendation for clients is that we revisit the policy as part of our overall financial planning process to assess changes as required at regular intervals.

    Why consider paying for permanent life insurance for your entire life?

    We don’t believe you should. If designed properly, permanent life insurance should last your whole life, but not be a cost over your whole lifetime. We typically propose life insurance planning be designed over 10, or 15 years. In some instances, when this strategy benefits the situation, we may design a 20-year timeframe to achieve the desired results.

    How We Can Help

    We provide support for what has already occurred as well as what has yet to be.


    We make decisions in our lives that are directly associated with the motives and financial resources available to us at the time. Often, at a later time, we find that circumstances have presented new considerations.

    Planning with permanent life insurance should be designed to grow with your plans as your life evolves. If this strategy is appropriate for your situation, we make sure to design your new policy with that in mind, working closely with clients to design new permanent life insurance policies build around your specific needs.

    Clients are often referred to us that have existing policies in place and we understand that concerns may lead to a need for evaluation. We provide full comprehensive reviews for existing universal life insurance and whole life insurance policies for possible changes within those policies that may be recommended if your needs have changed.

    When the need arises, as it often does, we also coordinate with attorneys to ensure that the requirements of wills and trusts are met. Below are some of the steps we take in each scenario:

    Comprehensive Review

    Of Existing Policies

    The current state of your policy

    The state of internal rate of return

    Initial design vs actual performance

    Special provisions that exist

    Beneficiaries and other updates

    Cash values and design details

    Evaluate paid-up options

    Evaluate Needs And

    Design A New Policy

    Confirm that this strategy is appropriate

    Establish goals and priorities

    Discuss and decide which type

    Execute initial design options

    Review various designs and fine tune

    Decide on the final design consideration

    Establish timeline and execute

    Collaborate With Other


    Establish what the requirements are

    Introductions or meetings scheduled

    Conduct meetings/ fact finding

    Delegate action items and timeline

    Follow up meetings/ check-ins

    Finalize details/ re-evaluate

    Complete process/ execute

    The life insurance policy best suited for your needs begins with care in its design

    Properly and responsibly designed permanent life insurance planning requires three factors for success:


    The primary consideration is the expertise of the advisor you partner with. They must be aware of all factors that could positively or negatively affect you in this process, including the inner workings of each policy and the company behind its contract.

    The second consideration is that the advisor cannot be employed by or tied exclusively to any one company. They must have the ability to evaluate all companies that represent your best interests, not their own or those of an insurance carrier that requires them to maintain their contract.

    The last consideration is the most important. The process should be a joint effort. One that allows you a clear understanding of all the details, an explanation of the variables, and even how outside factors could affect the policy in the future. Only then, should you study your specific options and selection process.

    tax smart investing and planning

    If you wish to explore Life Insurance Planning, we have successfully placed clients in this strategy time and time again, when their circumstances and needs aligned to make this the right tool for their long-term planning.

    With proper execution,

    life insurance planning can

    strengthen all of your other

    financial objectives, through care

    and expertise in design, built to last you

    a lifetime.